Realtors see hit in demand at the lower end

The rise in the buy-back rate, albeit by a smaller percentage than the previous highs, and the dismal hawkishness shown by the Reserve Bank of India plunged the residential real estate sector into gloom, as it feared that the demand for low- and middle-income homes would suffer.

The gloom is emerging among those making homes for the affordable sector as well as homes priced up to ₹ 2 crore, who depend almost entirely on bank loans for their purchases.

Publicly, while real estate brokers spoke courageously of continued demand and growth momentum in the economy, many of them privately admitted that it wasn’t good news for the sector, which is just getting back on its feet after years of sluggish demand and stagnant prices.

They may have to offer deep discounts and incentives to attract homebuyers, said a senior official at a city-based developer, which gets the bulk of its revenue from the lower end of the residential sector.

A sharp rise in prices

In nine months, the repo rate rose 250 basis points to touch a seven-year high of 6.5 percent. The RBI’s determination to stamp out inflation indicates that this is not the last rate hike. The marginal cost of lending rates to banks shows that about 60 percent of the increase has been transferred. The cost of borrowing will now rise from 10 to 20 basis points with Wednesday’s increase. A 20-year loan of £30,000 at 8.75 per cent would translate to a near 2 per cent increase in monthly expenses. So far, home loan rates have been accommodated by extending the tenure, but after one point, that just isn’t possible.

Home price trends

House prices have also increased by between 7 and 10 percent across India, and in some places like the National Capital Region, by double digits, making the cost of home ownership very expensive. Knight Frank India’s affordability index for the December quarter showed a deterioration of 1.4 percent over the previous year.

“A downturn seems likely in the near term,” said Rohan Sharma, director, JLL India, referring to the demand for affordable housing.

“We saw early signs of abating even in the fourth quarter (October-December) where sales fell slightly but the impact is starting to show,” he said.

He explained that since the bulk of demand in the residential market continues to be driven by housing loans, there is likely to be a short-term dip in sentiment as mortgage rates trend higher.

The Union Budget put more money in the hands of the people by introducing income tax rebate of up to ₹ 7 lakhs and rationalizing tax slabs. But rising mortgage rates and job losses in some sectors are likely to cause people to hold on to their savings.

Real estate consultancy ANAROCK found in a survey last month that in 2022, demand for affordable housing has fallen sharply since 2018. Of the country’s unsold inventory, a large part was in the affordable segment.